Congratulations To Venezuela: Bolivar Notes Are Now Worth Less Than It Costs To Print Them

The glorious triumph of Bolivarian socialism can chalk up another great victory in Venezuela. I do not say that the following is absolutely true, only that it is definitely true in part and looks highly likely to be true in whole and if not now that it will be in a few months. The economic policies of Presidents Chavez and Maduro have combined to make the country's banknotes worth less than they paper they're printed on. Of course, this has been true for some time of the small notes: but reasonable calculations tell us that this is either true now or about to be true of the country's largest bank note, the 100 Bolivar. Not quite of only the paper but around and about some reasonable estimates of the cost of producing a new note in that denomination. This is of course a glorious triumph: to be able to claim to lose money out of the making of money. That'll really stick it to international capitalism, won't it?

A few months back we had the news that Venezuela was trying to place large orders for more bank notes with printers around the world. They have a small indigenous operation but nothing like large enough to satisfy their inflation driven demand for more bills. So, off to the major bank note producing companies. The orders were large:

And the Venezuelan government isn’t finished. In December, the central bank began secret negotiations to order 10 billion more bills, five of these people said, which would effectively double the amount of cash in circulation. That order alone is well above the eight billion notes the U.S. Federal Reserve and the European Central Bank each print annually—dollars and euros that unlike bolivars are used world-wide.

Yes, by the standards of these things that's large. And yet it should also be hugely profitable. It's the one thing that government does which almost always manages to make money: making money. Because the process itself is very simple. You stick some ink in a nice pattern on some heavy paper and you call it money. Sure, there's a little more sophistication to this: that you can pay the taxes that government demands in that government's money helps for example. But you really are selling paper and ink for money. It costs the Federal Reserve in the US about 15 cents to make a $100 bill and they do in fact sell that for $100. That's a mighty profitable business and the profits from that go to the Treasury every year. Reasonable estimates are that the US makes some $20 billion in this manner annually (no, it's not the amount they actually print which is the profit, because they also pay out on old bills coming back. It's the stuff that goes overseas to be used by foreigners and never comes back which is the real profit). In the short term the profit is very good indeed as you expand the money supply and that's why governments running out of money do it. Look, look! we can just make more money!

However, there is a limit to that as the WSJ noted:

The Venezuelan central bank’s latest orders have been exclusively only for 100- and 50-bolivar notes, according to the seven people familiar with the deals, because 20s, 10s, 5s and 2s are worth less than the production cost.

So we've already powered past the lower value notes as being worthwhile printing. But I think a reasonable case can be made that the higher value ones are also not worth printing now. Yes, obviously, different bank notes have different costs. And while I've tried none of the bank note printers seem willing to offer price guidance: so, we can look at the public information we get from the Federal Reserve. $5 and $10 bills come in at either side of 10 cents per piece to make. The $100 has more security protection and is thus more expensive. Still, $4.90 profit on a bit of printing is OK, right?

Except how much is a 100 Bolivar note worth these days? At the real, free market (for which read black market) rate of 1,100 or so to $1 US, that's some 9 cents (9.09 for the accurately inclined). Which is alarmingly close to our presumed production cost, isn't it? Rather below it in fact. Which means that we've got the amusing if alarming thought that if Venezuela were in fact to order more 100 Bolivar notes then they would be, because they have to use the international firms, swapping widely usable US dollars for very much more restricted use Venezuelan bolivars of less actual value.

Which is about the point that you should give up really, just abolish the domestic currency and use the dollars directly. Seriously, it's an achievement isn't it? Debauching the currency so far that it's not even worth printing it any more?

There is a larger lesson for us here though. Sometimes economic policy is a matter of taste almost. It might make a marginal difference one way or another but it's no great shakes. Say, free college for all, I don't think it's a good idea but I don't think it will destroy the Republic nor its economy either. But there are other such policies out there which are disastrous. Zimbabwe proved that, in an economy heavily reliant upon commercial farming, taking all the farms away from the commercial farmers and giving them to people who don't know how to do it collapses an economy entirely. There things got so bad that the last run of bank notes wasn't worth the price of the ink necessary to print the next run of notes. Venezuela's mistake was anti-marketism rather than that much vaunted local flavour of socialism. Closer to home there are two policies currently floating around that I consider this sort of disaster. Not perhaps entirely economy destroying but definitely toward that end of the spectrum. I don't think a $15 minimum wage is going to work out well and nor do I think the US needs massive tax cuts and higher deficits right now. But 45% tariffs on Chinese imports and a subsequent likely trade war, or the introduction of a financial transactions tax of the type being talked about, yes, these are to me absurd economic policies which would do great damage.

My point being made here about Venezuela is that it really is possible for bad economic policy to crush an economy. Adam Smith did indeed say that there's a lot of ruin in a nation but the point there is "a lot", not an inexhaustible supply.

I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am....